China lowers growth target, cuts taxes as economy slows

Bloomberg

China lowered its goal for economic growth and announced a major tax cut, as policymakers seek to pull off a gradual deceleration while grappling with a debt legacy and the trade standoff with the US.
The gross domestic product (GDP) growth target released on Tuesday morning in Premier Li Keqiang’s annual work report to the National People’s Congress was set at a range of 6 to 6.5 percent for 2019. The shift to a band from the previous practice of using a point figure gives policy makers room for maneuver and compares with last year’s “about” 6.5 percent goal.
The lower bound of the GDP target would be the slowest pace of economic growth in almost three decades, a consequence of China’s long deceleration as policy makers prioritise reining in debt risks, cleaning up the environment and alleviating poverty. Warning of a “tough economic battle ahead,” Li announced
tax cuts worth 2 trillion yuan ($298 billion) for the year.
Economists surveyed by Bloomberg see output growth slowing to 6.2 percent this year from 6.6 percent in 2018, before easing further in 2020 and 2021. The report pledged to keep China’s leverage ratio “basically stable” in 2019. Policy makers are trying to rekindle lending to the private sector while avoiding an accelerated run up in debt, with the total debt pile now approaching 300 percent of GDP.
Unlike in previous years, there were no targets for retail sales growth or fixed-asset
investment in the reports.
A cut of 3 percentage points to the top bracket of value added tax was announced in a move aimed at benefiting the manufacturing sector. That plan was reported by Bloomberg News on Monday. In addition, a 1 percentage point cut to the 10 percent VAT bracket was announced. Combined, the VAT cuts are equivalent to as much as 800 billion yuan and will boost corporate earnings, according to Morgan Stanley.
The target budget deficit for 2019 was set at 2.8 percent of GDP, versus last year’s goal of 2.6 percent. The report pledged a “noticeable decrease” in the tax burdens of major industries, with the total of reductions in tax and social security fees coming to 2 trillion yuan.
The more modest growth target paired with further targeted stimulus measures typifies the government’s attempt to steady the economy after a bruising 2018 and marks a shift from last year’s edition, when the emphasis was on reining in financial risks and trimming budget outlays. Maintaining employment was given a higher priority than last year.
The report reiterated that monetary policy will remain “prudent,” while fiscal policy will be “proactive, stronger, and more effective.” Further cuts to the required reserves ratio for smaller banks are planned, according to the work report.
The US and China are close to a trade deal that could lift most or all US tariffs as long as Beijing follows through on pledges ranging from better protecting intellectual-property rights to buying a significant amount of American products. While that would remove one cloud hanging over the economy, debt
risks and signs of weakening
consumption at home remain.